What If The Automatic Stock Buying Stops?

...a dynamic worth paying attention to long before it becomes a problem.

My readers know that for the last couple of years I’ve repeatedly warned about the “passive bid” in markets. By that I mean the constant, automatic buying of stocks driven by retirement plans, ETFs, and other systematic investment programs.

This bid isn’t discretionary. It doesn’t ask whether valuations are reasonable and it doesn’t care whether earnings justify prices. It simply asks one question: did money flow in? If the answer is yes, it buys. It buys regardless of valuation, regardless of timing, and regardless of fundamentals.

This dynamic has created a market that behaves very differently from the one investors grew up with. Instead of price discovery driven by valuation and earnings expectations, we increasingly have price formation driven by flows.

And now one recent data point hints that this dynamic may be changing.